Cracks in the Credit Market Could Be a Warning for Wall Street

Another thing that we're seeing happen in our economy is major cracks in the credit market that could end up being a warning sign for Wall Street. We saw Tricolor a couple of months ago, who specializes in subprime auto loans, go bankrupt basically overnight. They targeted undocumented immigrants and gave most of their car loans to them. And in 2022, an investigation also found out that they were selling defective cars and charging above market interest rates. So they left a lot of people financially trapped and were basically in the predatory lending game, lending to people who probably can't afford to pay you back at extremely high interest rates and banking as much as they could along the way. And the thing is, this Tricolor collapse that we saw in September became a huge story because major banks were exposed during this. JP Morgan and Barclays, for example, these banks had lent hundreds of millions of dollars to Tricolor. And even worse, Tricolor used the same cars as Collateral for multiple loans, which is a form of fraud called double pledging. So this company was just corrupt from the ground up. And right after Tricolor collapsed, multiple other companies did as well. First Brands Group, which is an auto parts company, they filed for bankruptcy. Zion's Bank Corp and Western Alliance Bank Corp disclosed exposure to possible fraud from this. And co-founder of 777 Partners was charged with fraud for double pledging loans. This lender collapse was actually so bad that a lot of people are worried about the systemic risk it could cause in the regional banking system. Because what this collapse of Tricolor exposed is all the high borrowing costs that these subprime borrowers are facing. And the subprime auto loan delinquencies are also at all-time highs right now. You have high default rates on these loans, like I just said. And a lot of borrowers are using payment-in-kind loans, which is a desperate move where interest is added to the principal because they can't afford the payments. And there's a lot of evidence showing that these lenders are overvaluing the Collateral and even doing these double pledges, which is fraudulent. And the thing is, after we had the big great financial crisis in 2008, a lot of the regulations pushed the banks legally to take less risk. But all they did is kind of just shift the risk over to private companies. Because right now, the big banks in this country lend about $1.2 trillion a year to shadow lenders in the shadow banking system, which are private lenders, hedge funds, and non-bank financial institutions that end up forming and backing these companies like Tricolor. So at the end of the day, the money is still coming from the big banks. That's where it's sourced from. And when these companies get caught and exposed with fraud and end up going belly up, these big banks take losses along with it. So some economists are saying that, listen, this Tricolor collapse was basically a mini fire drill for what might come next. You know, this is them saying, essentially, you haven't seen anything yet. And we could see other major bankruptcies and collapse that could dwarf this one. And all of that has major implications on our financial and banking system.